November 28, 2009

Privatization of Parking

I stumbled across a blog that linked to an NYT piece about Chicago's very recent experience with privatizing some of their parking. Now, i'm very open to the real concerns of such things - for instance it is hard on a social justice level to completely justify increasing the costs of parking downtown. It is bound to discourage some of the disenfranchised from being able to afford to park and other similar issues.

Where I hold much less pity is where people use bastardized and nonsensical thinking to bash the economics of these deals outright. Having done a lot of financial modeling, I'm keenly aware that there are many ways to 'get one over' on others in contractual negotiations. But to immediately play the 'corporate greed' card without any real backup doesn't hold any water. Here is a section of the blog:
It’s Official: Chicago Parking Privatization a Massive Rip-Off

Last December, Streetsblog estimated that the Chicago deal would cost taxpayers "several hundred million to even a billion dollars in foregone parking revenue." Using the latest Morgan numbers, privatization expert Roger Skurski told reporters his "conservative estimate" -- Chicago could have earned about $670 million more by holding on to its meters. Back in June, before Morgan's revenue was known, Chicago's inspector general estimated the city could have gotten $2 billion in revenue, or $850 million more than it did from Morgan, had it raised rates and kept meter revenue to itself.
And the Times Piece:

"The parking meter company projects total revenues of more than $75 million and net income of about $58 million in 2010, after a second round of rate increases go into effect across the city on Jan. 1. In the first 10 ½ months of operation ending Dec. 31 of this year, the company expects $32.7 million in net operating profit, for a 70 percent profit margin."

“At this rate, it was a great deal for the parking meter company,” he said. “I don’t know if it was a good deal for the city. We should have just bit the bullet and done it ourselves.”

Obviously I disagree with their characterizations and posted this below on the blog.

There are quite a few points here to discuss..

First off, it is quite obvious that both the author AND the New York Times have a misconception of what the term "net revenue" means. Gross revenue means the amount of money you take in. Net operating revenue is gross revenue minus the expenses that you incur as part of being a business. At this point, it seems that the NYT and author believe that everything here is private profit, and there is some 70% profit margin, conveniently forgetting that the City of Chicago received a 1.15 BILLION DOLLAR CHECK upfront.

Lets assume that the NYT data is correct, $58M in "Net Revenue" in 2010. Throwing aside many things such as interest or income growth to make it simple - they would need to spend EVERY dollar of that net revenue for the first twenty years or so to even pay back their initial $1.15 Bn investment with the City. But seeing as how we're all familiar with how loans work, you can rest assured that the firms that put up this money borrowed a significant portion of it, and have to pay back those loans with a large interest portion. Its quite likely that 40 + years of operating revenue will go directly into paying down that initial investment.

Second, the amount of revenue that Chicago would have made from their current parking scenario would be LESS than a third of 1.15 Bn over the seventy five year period. (taking into consideration that A)the previous streetsblog link said that the City hadn't raised rates in 2/3 of the meters for over twenty years and B)a fairly standard estimate of discount rate)

Those parking rates are set and don't change because that is how local politics works. Assuming a hypothetical world where the City has the risk tolerance, political capital and actual capital to invest in running their parking as more of a business and then the will to pass substantial and regular parking rate increases to the level where they would equal or beat the privatization deal is akin to assuming that democrats and republicans in congress will all gather up with ponies and lollipops and pass bipartisan climate change, healthcare and budget legislation bills tomorrow. Too many important people will be worried about getting voted out of office and other political considerations for that to ever happen.

But even more ridiculous is then setting that fantasy scenario as your "Baseline" for comparing whether the City is getting a raw deal. Its like being upset at McDonalds because they don't have a vegan soy-portobello burger on menu. The anger and aspirations might be justified but frankly the place just doesn't work like that.